Don’t let a down payment get you down.
Saving for a down payment can be daunting, especially in today’s seller’s market. While prices vary widely throughout the country, the average price of a home in the U.S. as of June 2020 was $295,300. That means you would have to save $59,060 to make a 20% down payment. Here is how Private Mortgage Insurance (PMI) can save the day.
PMI enables you to secure a conventional mortgage with less than 20% down. A lower down payment, however, means you move in with less equity in the property, so you will need to purchase PMI. This insurance exists to protect the lender since you are a higher-risk buyer, but it also helps you to become a homeowner much sooner.
Typically, PMI is added as part of your regular monthly mortgage payment. PMI is charged on conventional mortgages, but all mortgages with a down payment less than 20% require some form of mortgage insurance.
According to Investopedia.com, the average PMI annually costs between 0.5 to 1.0% of the mortgage amount. For example:
Unless extended by Congress again, PMI unfortunately will no longer be tax deductible as of January 1, 2021.
Some lenders might also require a formal re-appraisal of the home before canceling your PMI. Additionally, you could be obligated to continue paying PMI for a pre-designated time period. Know the terms before you sign.
MIPs and VA funding fees are paid for the life of the loan, but some buyers are able to refinance these loans as conventional loans to eliminate mortgage insurance charges.
Some lenders will enable borrowers to avoid paying PMI by taking out a second small mortgage at a higher interest rate. For example: on a $200,000 home, a 20% down payment would be $40,000. If a borrower has only $20,000 saved for a down payment, he or she can take out a second higher-interest mortgage for the remaining $20,000. This is called a piggyback loan.
The borrower would pay a $20,000 down payment upfront plus two mortgage payments per month: the 80% mortgage and the 20% mortgage. This is called an 80-10-10 loan. Some borrowers decide to delay a home purchase and do more piggy-banking in lieu of piggybacking.
Contact one of our Mortgage Loan Officers today to get the key to your best move.
PMI enables you to secure a conventional mortgage with less than 20% down. A lower down payment, however, means you move in with less equity in the property, so you will need to purchase PMI. This insurance exists to protect the lender since you are a higher-risk buyer, but it also helps you to become a homeowner much sooner.
Typically, PMI is added as part of your regular monthly mortgage payment. PMI is charged on conventional mortgages, but all mortgages with a down payment less than 20% require some form of mortgage insurance.
- Conventional loans charge PMIs. These loans include fixed-rate and adjustable-rate mortgages.
- Government-backed loans charge MIPs. These loans include FHA and USDA mortgages. Both of these charge monthly Mortgage Insurance Premium (MIP) payments that work very similar to PMIs, plus a one-time fee. FHA loans are backed by the Federal Housing Authority, and their one-time fee (UPMIP) is 1.75% of the loan paid up front during closing. USDA loans are backed by the U.S. Department of Agriculture for property in rural and less populated suburban areas. Their one-time payment is 1% of the loan and it’s financed throughout the life of the loan.
- VA loans charge a one-time funding fee. These loans are backed by the U.S. Department of Veterans Affairs and their funding fees are also financed throughout the duration of the loan.
How much does PMI cost?
Actual PMI amounts will vary depending on your mortgage amount, the type of mortgage secured, down payment amount, and your credit score.| Type of Mortgage | Down Payment | Credit Score |
| Conventional | if < 20% | ≥ 680 |
| FHA | ≤ 10% | < 580 |
| 3.5% | ≥ 580 | |
| USDA | 0% | ≥ 640 |
| VA | 0% | ≥ 640 |
According to Investopedia.com, the average PMI annually costs between 0.5 to 1.0% of the mortgage amount. For example:
$200,000 mortgage x .01 = $2,000 annual PMI ÷ 12 months = $167 monthly PMI
Unless extended by Congress again, PMI unfortunately will no longer be tax deductible as of January 1, 2021.
How long do you have to pay PMI?
With a conventional mortgage, you can submit a request in writing to remove PMI from your payments once you own 20% equity in your home. This is also called having a Loan-to-Value (LTV) ratio of less than 80%. This means your remaining loan amount is less than 80% of the home’s assessed value. If you can pay additional principal each month, you’ll reach 20% equity sooner!Some lenders might also require a formal re-appraisal of the home before canceling your PMI. Additionally, you could be obligated to continue paying PMI for a pre-designated time period. Know the terms before you sign.
MIPs and VA funding fees are paid for the life of the loan, but some buyers are able to refinance these loans as conventional loans to eliminate mortgage insurance charges.
Another way to purchase a home with only a 10% down payment
Some lenders will enable borrowers to avoid paying PMI by taking out a second small mortgage at a higher interest rate. For example: on a $200,000 home, a 20% down payment would be $40,000. If a borrower has only $20,000 saved for a down payment, he or she can take out a second higher-interest mortgage for the remaining $20,000. This is called a piggyback loan.
The borrower would pay a $20,000 down payment upfront plus two mortgage payments per month: the 80% mortgage and the 20% mortgage. This is called an 80-10-10 loan. Some borrowers decide to delay a home purchase and do more piggy-banking in lieu of piggybacking.
Make your best move
Is it better to pay PMI to buy a home sooner or to continue paying rent while you save a 20% down payment? Whatever you decide, we’re here to help with both great savings options and a variety of mortgages, too.Contact one of our Mortgage Loan Officers today to get the key to your best move.